Wednesday, November 6, 2002

Taft now can't avoid tough budget realities

Tax hikes, gambling may loom

By Debra Jasper
Columbus Enquirer Bureau

Gov. Bob Taft will have little time to relish his victory before he faces one of the biggest political decisions of his career - whether to raise taxes or expand gambling to plug a huge hole in the state budget.

With the state facing a deficit that could be as high as $4 billion next year and the economy continuing its downward slide, Republican Senate President Richard Finan says legislative leaders are ready to hand the governor a political ultimatum.

Gov. Bob Taft's priorities in his second term:

• Budget: Getting a handle on the state budget will be the governor's immediate concern. Some experts project a $4 billion deficit next year because of declining tax revenues and rising costs. Mr. Taft says some tax increases on businesses may be necessary. He has declined to spell out what they should be. He maintains that it is too early to lay out a detailed budget plan. He has steadfastly opposed any kind of across-the-board tax increase without a vote of the people. Mr. Taft has told state agencies to prepare for more cuts to their budgets.
• Economy: Mr. Taft has proposed an ambitious Third Frontier Project, a $1.6 billion economic development program over 10 years that he hopes will bring Ohio into the next frontier where information and high technology create more high-paying jobs. Much of the program would be paid for with the sale of state bonds, which would require voter approval next year.
• Education: Mr. Taft has asked the Ohio Supreme Court to reconsider its 2001 ruling in the 11-year-old DeRolph case that the state would meet its constitutional mandate of an adequate system of schools for all Ohioans by spending more money on certain programs. He also says funding higher education will be a priority. Mr. Taft favors restoring caps on how much state colleges and universities can increase tuition.

One is to introduce a budget with a statewide tax increase and say to the governor, "If you like this, we'll pass it. If you don't, give us video lottery terminals as an alternative," said Mr. Finan, an Evendale Republican.

The other option is to put an issue on the ballot in the spring and let voters decide whether they want to pay more taxes or put video gambling machines at horse racetracks. The casino-type slot machines could bring in as much as $500 million a year for the state's ailing budget.

Either way, Mr. Finan says the governor will have to decide whether to support gambling - which he has long opposed - or push for new, politically unpopular tax increases in a bleak economic year.

"He's not going to hit the wall until the first of the year, and then it's going to be tough," Mr. Finan said. "He's going to have to decide what he wants to do."

Things will only get tougher for the governor if the Ohio Supreme Court weighs in during the next few months and requires the state to spend more on schools. At Mr. Taft's request, justices are reviewing their 2001 decision that, in effect, required that the state spend about $1.2 billion more a year on schools.

"If the court decides we must spend more money on education, there will be gambling or tax increases that will boggle people's imagination," predicted Don Berno, senior vice president of government relations for the Greater Columbus Chamber of Commerce.

"If that happens and the economy doesn't have a remarkably strong recovery, there are going to be a whole bunch of unpleasant choices," he said. "There will be more spending cuts, and they'll have to get into programs."

Officials in the Taft administration said last week if the court requires more spending, they might ask legislators to put a sales or income tax increase on the ballot. The governor said the ballot issue would earmark the money for education.

Mr. Finan, however, dismissed that option as unrealistic. He thinks legislators are in no mood to ask voters to raise taxes without giving them a gambling alternative. "Proposing any new taxes is going to run into a buzz-saw in the General Assembly," he said. "I'm not sure you could do a flat-out tax all by itself."

Already, the state and local tax burden for every man, woman and child in Ohio is $2,870 - putting Ohio 20th among the 50 states. That figure doesn't include property taxes, which have risen 90 percent in the past decade.

Families are increasingly paying more of the tax burden. In 1997, corporations supplied 9 percent of all state general revenue funds but only 4.6 percent in 2002. Meanwhile, personal income taxes accounted for 42 percent of those revenues in 1997 but jumped to 47 percent this year.

The budget crisis poses a huge dilemma for Mr. Taft, who said as late as last week he would veto any legislation that expands gambling. If he holds to that promise, and also refuses to push for a tax increase on businesses or residents, his options are limited.

The governor, who has been criticized even by members of his own party for failing to show leadership during the latest budget crisis, no longer has the option of using rainy-day funds to make ends meet. The state drained its $1 billion savings account to balance this year's budget.

With no savings to lean on, the governor may have to make deeper cuts in higher education, Medicaid benefits or other popular social programs. Mr. Taft promised to spend more on higher education in his next term.

He also strongly criticized his opponent, Democrat Tim Hagan, for his plans to make cuts in the Medicaid program that the governor said would hurt seniors.

If higher education is off the table, "things like Medicaid reimbursements are going to be on the line," Mr. Finan said. "He (Mr. Taft) is going to have to look at his choices long and hard. It will be very painful."

Mr. Berno said the governor isn't likely to be rescued from such tough decisions by a spike in current sales or income tax revenues. He notes consumer confidence is at its lowest levels in nine years.

"Sales and income taxes drive state revenues," Mr. Berno said. "And the outlook for holiday spending is expected to be bleak."

The sour economy combined with Mr. Taft's opposition to statewide tax increases, new forms of gambling or steep budget cuts will also make it difficult for him to live up to his promise in October to put a cap back on tuition rates at universities. Tuition jumped by double digits this year after legislators removed the caps and cut $240 million from the higher education budget.

If the governor caps tuition rates without increasing spending on higher education, he would put a "double whammy" on universities, said Herb Asher, political science professor at the Ohio State University.

In addition to those problems, he said Mr. Taft must also figure out how to win taxpayer support for the Third Frontier, his plan to spend $1.6 billion over 10 years to attract more high-tech businesses to Ohio.

"It is obviously going to be a challenge for him to put together a balanced budget and support his priorities," Mr. Asher said.

To meet the challenges next year, he said the governor should try to build a bipartisan coalition. "It's going to take a lot of leadership from the governor's office. He'll need to start talking to Democrats early."

Sen. Mark Mallory, D-Cincinnati, a minority whip in the Senate, said Republicans have treated Democrats so shabbily in the past, they have a lot of ground to make up. "We will all have to sit down together and craft a plan or it won't work," he said.


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